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INSURANCE
A New Way to Save on Premiums
(Page 2 of 4)
by Mary Beth Franklin & Kimberly Lankford
Earnings in an HSA grow tax-free, just as in a 401(k) or IRA. But unlike retirement plans, you can dip into an HSA at any age -- tax-free -- to pay for medical expenses, including your deductible and co-payments and many charges that typically aren't covered by health insurance, such as over-the-counter drugs, vision and dental care (even orthodontia and laser eye surgery), long-term-care insurance premiums and future medigap premiums.
"The HSA is the most tax-efficient investment vehicle available," says Jon Kessler, chairman of WageWorks, an employee-benefits consulting firm in San Mateo, Cal. "Money is not taxed on the way in. It grows tax-deferred. And if used for medical purposes, it's not taxed on the way out."
Unlike flexible-spending accounts (FSAs) used to pay for health-care expenses, HSAs allow unspent money to be rolled over from one year to the next, potentially building up a tax-free stash of savings. The money doesn't have to be used for health care. But you will owe income tax on earnings if funds are withdrawn for other purposes, and a 10% penalty will be imposed on any nonqualified withdrawal before age 65. (After 65, the money may be withdrawn penalty-free for any purpose, but earnings not used to pay medical bills will be taxed.)
Speaking of FSAs, you can't have an HSA if you use a flexible-spending account to pay health-care costs with pretax dollars or if you have other medical coverage (say, through a spouse's policy). However, if your FSA restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA, too.
Savings in action
Bill Lomel, who owns a roofing company in Atlanta, is an early convert. "I was just so discouraged about the cost of health insurance," he says. He was already struggling to pay $750 a month for insurance for himself and his three children when he got a notice that the cost of the group policy for his employees was going to soar. "I thought, There's no way I can charge enough for anything in my business to cover that expense. I want to offer good competitive benefits to my employees, but I can't."
Now, maybe he can. He started by opening an account for his own family. After searching eHealthInsurance.com for HSA-eligible policies, he selected one from Golden Rule that cost just $250 per month. The deductible is a hefty $5,000 per year, but Lomel is saving $6,000 a year in premiums and investing almost that much in a health savings account. He'll use the HSA to pay extra out-of-pocket expenses and to save for future costs.
"Basically it's paid back in less than a year," he says. "If I don't use it, I can roll the money into retirement dollars. I never lose."
Even though the deductible is higher, Lomel would rather save the money on premiums and have more control over his medical expenses. "We have no major health problems, and I don't think it's important to pay tons of money for insurance to cover doctors' visits. We have insurance for the big things," he says. "If I don't use it, I get to keep it instead of having the money go into the system."
Lomel was so impressed with his experience that he plans to fund HSAs for his 25 employees in lieu of offering group health insurance that was costing him up to $1,100 per month for each of his employees' families. By switching to high-deductible policies, he'll save thousands of dollars in monthly premiums. He plans to use some of that money to contribute to his employees' HSAs, which they can then use for out-of-pocket costs.
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